MFS ADVISOR EDGESM

MFS HERITAGE PLANNING® > RETIREMENT Distributions of Employer Stock From 401(k) Plans

mfs.com

If you participate in an employer-sponsored retirement plan and decide to change jobs or retire, you will be faced with some important decisions. While many choose to roll over their plan balance to an individual retirement account (IRA), if you have company stock in your plan, you could forfeit a significant tax advantage — net unrealized appreciation (NUA) — by rolling over the stock.

Net unrealized appreciation is the difference gains. Therefore, if employer securities are between the original cost and the current fair rolled over into an IRA, any potential for long- market value of the employer stock while held term capital gains treatment on the NUA and in a qualified retirement plan. When a plan subsequent appreciation is lost. participant receives a lump-sum distribution If you elect a partial rollover instead — with only that includes employer stock, special federal the portion of the lump sum not consisting of the tax rules allow the participant to defer paying employer stock being rolled over — there is no federal taxes on the NUA. current tax on the rolled over portion. However, there is tax at ordinary income tax rates on the Tax-saving strategy value of the stock when it was obtained by the If you receive greatly appreciated employer plan (i.e., cost basis). And if you are under age securities as part of a lump-sum distribution 59½, you may be subject to a 10% penalty on payment of your entire retirement plan assets the cost basis of the stock. within a single tax year, you should carefully consider whether or not to roll over these securities into an IRA. All distributions from IRAs are taxed as ordinary income, not as capital

KEY POINTS

■■ If any part of your 401(k) plan is invested in employer stock, make sure you understand the tax implications of either rolling over or taking a lump-sum distribution from your 401(k) when you change jobs or retire.

■■ Make sure you tell beneficiaries that the NUA tax break may apply to them.

■■ Note that the potential NUA tax break is void if your entire interest in this plan or potentially other employer plans is not distributed in the same calendar year.

This material should be used as helpful hints only. Each person’s situation is different. You should consult your investment professional or other relevant professional before making any decisions.

NOT FDIC INSURED • MAY LOSE VALUE • NO BANK GUARANTEE MFS ADVISOR EDGESM PAGE 32

Distributions of Employer Stock From 401(k) Plans

Final considerations $100: Current XYZ Corporation stock trading price Because there may be significant income tax advantages when $100 $85 you take employer securities from an employer-qualified plan, you should consider whether taking a portion of the employer shares NUA Not taxed until $80 (net unrealized stock is sold; in kind from the plan is the right strategy for you. The number of appreciation) long-term in-kind shares of employer stock ultimately taken will depend $60 capital gain largely on a number of tax and investment decisions. It is important tax rates apply to work with your tax advisor, financial advisor or investment $40 $15 professional to determine which strategy to employ, as owning Taxed in the year too much of a single investment could expose you to significant $20 of distribution investment risk. at the ordinary Cost basis $0 income tax rate Employer stock is subject to the same risks as any stock. The This hypothetical example is for illustrative purposes only. stock could be worth more or less than its original cost at the time it is sold. By holding company stock as opposed to selling it, an investor assumes the risks of any shareholder. Additionally, some How stock is taxed investors, as a result of employer stock purchase programs, may The cost basis of the stock is taxable when distributed; any net have a significant percentage of their assets in company stock. unrealized appreciation attributable to employer stocks is not Selling a portion of the employer stock may allow you to diversify taxed until you sell the stock. Additionally, when the stock is sold, your portfolio. Speak with your tax advisor, financial advisor the net unrealized appreciation as of the date of the lump-sum or investment professional to review what percentage of your distribution is taxed at the long-term capital gain rate rather than holdings is in employer stock and ensure that your portfolio as ordinary income, which may entitle you to more favorable tax aligns with your goals, time frame and appetite for risk. rates on this sum. Any additional appreciation that accumulates There are advantages and disadvantages to an IRA rollover after the date of the lump-sum distribution must be held for at least depending on investment options, services, fees and expenses, a year to be given long-term capital gains treatment. The difference withdrawal options, required minimum distributions, tax treatment in the two tax rates can be substantial, particularly if you are in the and the investor’s unique financial needs and retirement goals. highest tax bracket of nearly 37% for this tax year. Please be aware that rolling over retirement assets into one IRA account could potentially increase fees as the underlying funds The benefits of NUA may be subject to sales loads, higher management fees, 12b-1 One of the key benefits of receiving employer securities from a fees or IRA account fees such as custodial fees. For assistance in qualified plan is that the NUA portion will be taxed at the applicable determining if a rollover to an IRA is appropriate for you, consult capital gain tax rates. your financial advisor or investment professional. Assume an investor, age 62, receives a share of XYZ Corporation stock (company stock) from his or her’s employer’s qualified —This material is provided for general and educational retirement plan, which is currently trading at $100. The employer’s qualified retirement plan trustee’s cost basis of the stock is $15. The purposes only and is not investment advice. The investments $85 difference represents NUA. Only the $15 is subject to taxation you choose should correspond to your financial needs, at the ordinary income tax rates in the year of distribution. The $85 goals and risk tolerance. Please consult an investment NUA will not be taxed until the year that the stock is sold and may professional before making any investment or financial be taxed a lower capital gains rate if the shares have been held at decisions or purchasing any financial, securities or least one year. investment-related service or product, including any investment product or service described in these materials.

Contact your financial advisor or investment professional for more information or visit mfs.com.

MFS® does not provide legal, tax, or accounting advice. Any statement contained in this communication (including any attachments) concerning U.S. tax matters was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code. This communication was written to support the promotion or marketing of the transaction(s) or matter(s) addressed. Clients of MFS should obtain their own independent tax and legal advice based on their particular circumstances.

MFS FUND DISTRIBUTORS, INC., BOSTON, MA HP-RETNUA-FLY-6/21 10654.15